CORRUPTION AS A SELF-REINFORCING “TRAP”: IMPLICATIONS FOR REFORM STRATEGY Matthew Stephenson WORKING PAPER SERIES 2019:10 QOG THE QUALITY OF GOVERNMENT INSTITUTE Department of Political Science University of Gothenburg Box 711, SE 405 30 GÖTEBORG June 2019 ISSN 1653-8919 © 2019 by Matthew Stephenson. All rights reserved. Corruption as a Self-Reinforcing “Trap”: Implications for Reform Strategy Matthew C. Stephenson QoG Working Paper Series 2019:10 June 2019 ISSN 1653-8919 ABSTRACT Corruption is widely believed to be a self-reinforcing phenomenon, in the sense that the incentive to engage in corrupt acts increases as corruption becomes more widespread in the relevant community. Leading scholars have argued that corruption’s self-reinforcing property implies that incremental an- ticorruption reforms cannot be effective, and that the only way to escape a high-corruption equilib- rium “trap” is through a so-called “big bang” or “big push.” This widespread view is mistaken. After surveying the reasons corruption might be self-reinforcing (or in some cases self-limiting), this paper demonstrates that corruption’s self-reinforcing property does not imply the necessity of a “big bang” approach to reform, and indeed may strengthen the case for pursuing sustained, cumulative incre- mental anticorruption reforms. Matthew Stephenson1 Eli Goldston Professor of Law Harvard Law School [email protected] 1 I am grateful to Jeeyang Rhee Baum, Ray Fisman, Miriam Golden, Dan Hough, Nils Köbis, Ina Kubbe, Paul Lagunes, Louis Kaplow, Rick Messick, Ben Olken, Bonnie Jo Palifka, Dani Rodrik, Susan Rose-Ackerman, Kathy Spier, Cass Sun- stein, and Matthew Taylor, as well as workshop participants at Harvard Law School, the Quality of Government Institute at the University of Gothenburg, FGV Direito Rio, Science Po, the Amsterdam Center for Law and Economics, the Uni- versidad de la Republica (Uruguay), and Transparency International (Secretariat and UK office) for helpful comments and suggestions. In many settings, an individual’s decision whether to engage in some action is contingent on how many other people engage (or are expected to engage) in similar behavior. Some conduct is self-rein- forcing, in the sense that an individual’s incentive to engage in that conduct is stronger when the con- duct is more widespread. Other kinds of behavior are self-limiting, in the sense that as the conduct becomes more prevalent, each individual’s incentive to engage in that conduct weakens. Econo- mists have developed more precise, rigorous frameworks for exploring the implications of these sorts of contingent behavior (Schelling 1978; Akerlof 1980; Arrow 1973; Diamond & Dybvig 1983; Cooper & John 1988). In the context of crime and crime control, for example, a family of eco- nomic models proceeds from the assumption that the incentive to commit a crime depends on the pervasiveness of similar crimes in the relevant community. Such models have been used to explain otherwise puzzling patterns in the incidence and dynamics of criminal behavior, and also—perhaps more importantly—to inform attempts to alter such behavior through policy interventions (Bar- Gill & Harel 2001; Baumann & Freihe 2015; Fender 1999; Glaeser et al. 1996, 2003; Kahan 1997; Kleiman 1993; Marceau 1997; Rasmusen 1996; Sah 1991; Schrag & Scotchmer 1997; van der Weele 2012). In some cases, scholars have deployed relatively simple contingent-behavior models to advance ag- gressive critiques of conventional reform strategies and to advocate for alternative approaches. We see this especially clearly in the context of the global fight against corruption. Corruption—an ad- mittedly fuzzy term that for present purposes includes things like bribery, embezzlement, nepotism, and other abuses of office for private gain (World Bank 1997; International Monetary Fund 2018)—is present in all societies, yet the nature and extent of corruption vary dramatically both across and within countries. Moreover, despite the fact that fighting corruption has been a high pri- ority for many governments and international organizations for decades, modern examples of sig- nificant progress in reducing corruption are frustratingly rare (Hough 2017, p. 171; Persson et al. 2012; Rothstein 2018; Taylor 2018).2 A number of influential analysts have argued that, putting 2 That said, as Hough (2017, p. 172) points out, the paucity of dramatic transformations “need not … lead us to be all doom and gloom. Progress has been made, both in the developed and the developing world.” Indeed, the literature has paid increasing attention to modern anticorruption success stories, though the degree of success in many of these cases is debatable See, e.g., Mungiu-Pippidi (2015, pp. 130-160) (discussing Botswana, Chile, Estonia, Georgia, South Korea, Taiwan, and Uruguay); Mungiu-Pippidi & Johnston (2017) (edited volume including chapters on Botswana, Chile, Costa Rica, Estonia, Georgia, Qatar, Rwanda, South Korea, Taiwan, and Uruguay); Quah (1994) (discussing Hong Kong and Singapore); Quah (2017) (discussing Botswana, Hong Kong, New Zealand, Rwanda, and Singapore); Taylor (2018) (dis- cussing Georgia, Japan, and Rwanda). Fisman & Golden (2016, pp. 215-226) also suggest Italy’s “Clean Hands” crack- down in the mid-1990s as an example of a successful anticorruption effort, though others dispute how successful this crackdown actually was in the longer term (Della Porta & Vannucci 2012; Taylor 2018). Researchers are also examining more closely how many Western countries, such as the United States, the United Kingdom, France, Germany, Denmark, 3 aside the details of individual cases, this apparent lack of success is due, at least in part, to a failure to appreciate the extent to which corruption is a form of self-reinforcing behavior. Those who advance this critique typically make a series of interlocking claims, beginning with the assertion that the incentive to engage in corruption is higher when corruption is (or is expected to be) more widespread. The next step in the argument is to assert that corruption’s self-reinforcing nature implies that the same society will typically have more than one stable equilibrium corruption level: both a “high-corruption equilibrium,” in which the ubiquity of corruption strengthens incen- tives for individuals to behave corruptly, thus ensuring that corruption remains widespread (a “vi- cious cycle”), and also a “low-corruption equilibrium,” in which corruption’s rarity makes engaging in corrupt acts sufficiently unattractive that corruption remains rare (a “virtuous cycle”). The bold claim that many analysts derive from this characterization of the phenomenon is that for societies in the high-corruption equilibrium, partial or incremental reforms will not be effective, and might even be counterproductive. What is needed instead, the argument concludes, is a “big bang” (or “big push”): a comprehensive reform package that attacks corruption on many fronts simultane- ously, thoroughly, and quickly, so that the society pushes past the so-called “tipping point” and shifts from the high-corruption equilibrium to the low-corruption equilibrium. This is not a fringe view. Many of the leading figures in anticorruption and development studies have advanced some version of the argument that corruption’s self-reinforcing nature implies mul- tiple equilibria, which in turn implies the need for a “big bang” rather than a piecemeal approach. The influential development economist Paul Collier (2006, p. 195), for example, has claimed that in order to escape from a high-corruption equilibrium trap, “a country needs a major effort—a ‘big push’. In the absence of a big push, marginal, incremental efforts get overwhelmed by the locally stabilizing forces of the trap.” (See also Collier 2000.) Along similar lines, Susan Rose-Ackerman— perhaps the single most important figure in the economic analysis of corruption—has written (1999, pp. 55-56) that if “the net rewards of corruption increase as the incidence of corruption in- creases,” then the society “may get caught in a trap where high corruption levels beget high corrup- tion levels,” such that a low-corruption equilibrium is “unreachable in small steps from the status Sweden, and others, managed to dramatically improve the integrity of their governments over the course of the 19th and early 20th centuries (Glaeser & Goldin 2006; Mungiu-Pippidi 2015, pp. 57-82; Rose-Ackerman & Palifka 2016, pp. 213- 214, 423-425; Cuellar et al. 2018; Teorell & Rothstein 2015; Rothstein & Teorell 2015). 4 quo”; escaping this “high corruption trap,” she continues, “may require a large increase in law en- forcement resources to tip the system to a low corruption equilibrium.”3 Paulo Mauro, a senior IMF official who helped pioneer the study of corruption’s economic consequences, likewise con- cludes (2004, p. 4) that “as is often the case with models involving … multiple equilibria, … gradual reforms are less likely to work than more ambitious, comprehensive reforms.” Perhaps the most extensive development of the argument that endemic corruption, as a self-reinforcing phenome- non, demands a “big bang” response is Bo Rothstein’s influential 2011 article, the abstract of which succinctly explained (p. 228) that in systemically corrupt countries, “following the incremental ap- proach is dysfunctional…. [W]hat is needed to establish [a] new equilibrium … is a ‘big bang’ type of change.”4 That view is echoed by Ray Fisman and Miriam Golden’s (2017) excellent introductory handbook on corruption,